Lack of Performance Reporting (Part 10)

I am going to conclude this blog series by discussing “Advisers’ Little Secret: Their Past Results,” an August 2011 Wall Street Journal article by Jaime Levy Pessin.

     > You can comparison-shop for almost anything online. But probably
     > not if you’re an individual looking for an investment adviser—at
     > least not if you want to compare advisers’ performance.

Along with the long list of links I included in Part 8, here is another affirmation of the title for this blog series.

     > While the performance of mutual funds is published daily and
     > [while] investment firms that cater to institutional investors
     > are expected to publicly document their results, such reporting
     > is rare among advisers who work with individual investors.

This reminds me of Dave O’Brien’s statement about “hawking a product.” I simply disagree because GIPS provides for performance reporting either way.

     > Many money managers do offer performance numbers to
     > prospective clients who ask for them in face-to-face meetings.
     > But that doesn’t make it easy to shop around… Steffen Binder,
     > managing director of MyPrivateBanking, a Switzerland-based firm
     > that provides information… for clients of private banks and
     > wealth managers… [says] “in today’s world, publishing
     > information on the websites is the gold standard of disclosure.”
     >
     > Why the lack of such basic information? After all, posting results
     > would be “a clear advantage for good performers.” Mr. Binder notes.
     >
     > Regulatory and legal concerns are a major hurdle. Advisers don’t
     > want to be accused of promising too much, and avoiding that pitfall

This surprises me and seems quite reminiscent of the adviser perspective on why financial publications don’t include inferential statistics: “‘significance’ is a term that may implicitly overstate findings to a degree that may mislead unsophisticated readers, putting the writer/magazine at risk.”

     > can be expensive. Also, some advisers say the diversity of the

GIPS is expensive.

     > portfolios they put together for their clients makes it difficult
     > in many cases to provide performance measures that would be
     > relevant to many prospective investors.

As discussed last time, GIPS can account for this.

     > The SEC doesn’t require IAs to publish performance information.

I think it should.

     > It does offer guidelines for what can and can’t be included in…
     > [advertised performance]… advisers aren’t allowed to pick only
     > their best clients or… best time frames… in order to pad the
     > results. Results also need to be displayed net of fees.

GIPS accounts for all this.

     > Steven Stone… of… law firm Morgan, Lewis & Bockius LLP, says…
     > [although] GIPS rules are clear, there are still many judgment
     > calls… such as which accounts to include in a composite… often
     > firms attempting to achieve GIPS compliance hire a consultant or
     > lawyer to help with the process, he says, and that can get pricey.

Is cost the only downside to GIPS?

I will continue next time.